Federal Court of Australia

Michell v Cvetkovic [2022] FCA 1295

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 588M of the Corporations Act 2001 (Cth), the defendant pay to the second plaintiff the sum of $204,694.75.

2.    Pursuant to s 51A of Federal Court of Australia Act 1976 (Cth), the defendant pay interest on the amount in paragraph 1 from the date the first plaintiff was appointed as liquidator of the second plaintiff in the amount of $73,317.72, as calculated in the attached schedule.

3.    The defendant pay the plaintiffs’ costs of the proceeding.

ANNEXURE A

Schedule – interest calculations on $204,694.75

Calculated in accordance with paragraph 2.2 of the Interest on Judgments Practice Note (GPN-INT)

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MCEVOY J:

1    The plaintiffs, Stephen John Michell in his capacity as liquidator of Continuity and Compliance Management Services Pty Ltd (in liquidation) and Continuity and Compliance Management Services Pty Ltd (in liquidation) (the Company), by interlocutory application filed 12 August 2022, seek orders for default judgment pursuant to s 5.23(2)(c) of the Federal Court Rules 2011 (Cth) against the defendant, Mr Steven Cvetkovic, for some of the relief claimed in the statement of claim, together with interest and costs.

2    The plaintiffs claim that the defendant breached duties he owed the Company as a director not to engage in insolvent trading and that in so doing he breached s 588G(2) of the Corporations Act 2001 (Cth) causing loss and damage to certain creditors. The plaintiffs also claim that the defendant breached duties he owed as a director pursuant to ss 180, 181 and 182 of the Act, causing loss and damage to the Company. By their application the plaintiffs seek judgment on their insolvent trading claim (but not their breach of directors’ duties claim which they accept is barred by s 1317K of the Act).

3    The bases for the plaintiffs’ default judgment application are that:

(a)    the defendant has not filed and served the defence which the Court ordered on 4 October 2021 be done by 12 December 2021; and

(b)    by his conduct the defendant has evinced an unwillingness to cooperate with the Court and the plaintiffs in the conduct of the proceeding, which unwillingness has prejudiced the preparation of the matter for trial.

4    The plaintiffs rely on the following material in support of the application:

(a)    affidavit of Justin Paul Hogg sworn 18 February 2021;

(b)    affidavit of John Buordolone sworn on 1 August 2022; and

(c)    affidavit of Justin Paul Hogg sworn on 26 September 2022;

(d)    affidavit of John Buordolone sworn on 27 October 2022.

5    For the reasons that follow I have determined that the plaintiffs should have judgment on their insolvent trading claims, together with interest and costs.

the proceeding

6    Insofar as their insolvent trading claim is concerned, the plaintiffs plead, in summary, that:

(a)    the defendant had a duty to prevent the Company from incurring a debt while the Company was insolvent or where there were reasonable grounds for so suspecting;

(b)    the Company failed to maintain proper books and records in accordance with s 286 of the Act;

(c)    the Company was presumed to be insolvent at all material times pursuant to s 588E(4) of the Act, and in the alternative was insolvent within the meaning of s 95A of the Act during the relevant period;

(d)    the Company incurred debts to creditors during the relevant period in the total sum of $204,694.75;

(e)    at the time each of the debts was incurred, there were reasonable grounds for suspecting that the Company was insolvent, or would become insolvent;

(f)    at the time each of the debts were incurred, the defendant was or should have been aware that there were reasonable grounds for suspecting that the Company was insolvent, or would become insolvent by incurring one or more of the debts;

(g)    the defendant failed to prevent the Company from incurring each of the debts or any part of the debts;

(h)    by reason of the foregoing the defendant contravened s 588G(2) of the Act;

(i)    each of the creditors to whom the debts are owed is unsecured and has suffered loss and damage in the amount of their respective debts; and

(j)    despite demands, the defendant has failed and/or refused to pay any amount to the Company in respect of the debts.

7    The proceeding was commenced by originating application on 13 January 2021. The originating application, statement of claim and supporting affidavit was personally served on the defendant on 15 February 2021.

8    The first case management hearing occurred on 4 March 2021. The defendant did not appear at the hearing. He emailed the Court an unparticularised medical certificate stating that he was “unfit to continue his usual occupation”. A representative of the defendant emailed the Court on the day of the case management hearing informing the Court that the defendant was “in no [m]edical condition to attend the virtual” hearing. It appears that this representative of the defendant, Mr Stuart Dunning, is a senior investigator at a company called the 24/7 Group and not a legal representative.

9    The Court adjourned the first case management hearing in order for the plaintiffs to obtain more information in relation to the defendant’s medical condition. The plaintiffs requested more information from the defendant, but these requests were ignored.

10    There was a second case management hearing on 4 October 2021. Once again the defendant did not appear. Mr Dunning emailed the Court shortly prior to the hearing on the defendant’s behalf to request a 30 day adjournment “due to re-preparation of the evidence that was intended to be provided” and as the defendant was “still suffering from mental health issues”. Orders were made that day amongst other things that the proceeding continue by way of pleadings, that the defendant file and serve a defence by 12 December 2021 and that costs be reserved.

11    On 6 May 2022, 10 May 2022, 11 May 2022 and 16 May 2022 the Court wrote to all parties by email in relation to a case management hearing listed for 19 May 2022. No response was received from the defendant, but no ‘bounce back’ emails were received by the Court either. Furthermore, on 9 May 2022 the plaintiffs sent a letter via email, text and Facebook message to the defendant requesting that a defence be filed, failing which the plaintiffs would apply for judgment.

12    There was a third case management on 19 May 2022. The defendant had not filed a defence and nor did he appear at that hearing. The plaintiff made an oral application at that hearing for default judgment. In the absence of proper material the case management hearing was adjourned to a date to be fixed, and costs were reserved.

13    On 20 May 2022 the Court emailed a copy of the orders made on 19 May 2022 to all parties. The Court received a ‘bounce back’ email from the defendant’s email address to the effect that the email was undeliverable.

14    On 12 August 2022 the plaintiffs filed the present application. On 24 August 2022 the Court emailed the parties listing the matter for interlocutory hearing on 28 October 2022 and received another ‘bounce back’ email from the defendant’s email address. The notice of listing was therefore posted to the defendant’s last known postal address.

15    On 26 August 2022 the Court posted to the defendant’s last known postal address a copy of orders made that day in relation to the filing of material prior to the interlocutory hearing listed for 28 October 2022.

16    The application and supporting affidavit were personally served on the defendant on 25 September 2022. Nevertheless, nothing was received from the defendant, and when the application was called on 28 October 2022 the defendant did not appear.

Default judgment

Principles

17    In order to be satisfied that an applicant is entitled to the relief sought pursuant to r 5.23(2)(c) of the Rules, the Court must be satisfied that the respondent has been served with the relevant documents and that the Court has jurisdiction to grant the relief: Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 at [18] (Flick J).

18    Rule r 5.23(2) relevantly provides that:

If a respondent is in default, an applicant may apply to the Court for:

…

(c)     if the proceeding was started by an originating application supported by a statement of claim or an alternative accompanying document referred to in rule 8.05, or if the Court has ordered that the proceeding continue on pleadings – an order giving judgment against the respondent for the relief claimed in the statement of claim or alternative accompanying document to which the Court is satisfied that the applicant is entitled; or

…

(e)     an order mentioned in paragraph (b), (c) or (d) to take effect if the respondent does not take a step ordered by the Court in the proceeding in the time specified in the order.

19    The principles applicable to the power to enter default judgment were essayed by Yates J in Chamberlain Group Inc v Giant Alarm System Co Ltd (No 2) [2019] FCA 1606 as follows:

[13]    The power to give judgment against a defaulting party is undoubtedly discretionary. The discretion must be exercised cautiously. Where the defaulting party is a respondent to a pleaded claim, the giving of judgment for final relief on the application will deliver complete success to the applicant without investigation of the merits of the pleaded claim: ACOHS Pty Ltd v Ucorp Pty Ltd [2009] FCA 577 at [27]. There is no requirement that the act or acts of default be intentional or amount to contumelious conduct. There is no requirement that the act or acts of default result in inordinate or inexcusable delay. That said, such features, if present, will be relevant to the exercise of the Court's discretion. So too will conduct that persuades the Court that the defaulting party is manifesting an inability or unwillingness to cooperate with the Court and the other party or parties to the proceeding.

[14]    Rule 5.23(2)(c) requires the Court to be satisfied that the applicant is entitled to the relief claimed in the statement of claim. This requirement has been interpreted as meaning that the Court must be satisfied that 'on the face of the statement of claim' the applicant is entitled to the relief that is claimed. It is not a requirement that the applicant prove its claim by way of evidence. Put another way, the facts alleged in the statement of claim are taken to have been admitted: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2007] FCAFC 146; 161 FCR 513 at [42]. If, on inspection of the statement of claim, the Court is satisfied that the applicant would be entitled to the relief sought then this requirement of r 5.23(2)(c) will be met: CNIP Pty Ltd v Chan & Naylor Norwest Pty Ltd (No 2) [2011] FCA 1170 at [18] - [19]; Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 at [23]. The Court may permit further evidence to be adduced, but not evidence that would alter the pleaded case: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2006] FCA 1427; 236 ALR 665 at [45], [48] - [50]; United Broadcasting International Pty Ltd v Turkplus Pty Ltd (No 2) [2010] FCA 1413 at [42] - [44]; Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352; 195 FCR 1 at [62] - [63].

(Emphasis added)

Consideration

20    I am satisfied that the defendant was personally served with the originating process, statement of claim and affidavit in support in accordance with the Rules. The defendant was obliged to file a notice of address for service as required by r 5.02, and he failed to do so. The defendant is in continuing default of r 5.22(a) in this regard.

21    I am satisfied that the defendant was on notice of each of the returns of the originating application before Anastassiou J on 4 March 2021 and 4 October 2021, and before me on 19 May 2022. Noting that the defendant did not appear today, I am satisfied that he is also in default of r 5.22(c).

22    Order 3 of the 4 October 2021 orders also required the defendant to file a defence. He has not done so. I am satisfied therefore that he is also in default of r 5.22(b) of the Rules.

23    Given these defaults, the Court is empowered to make orders pursuant to r 5.23(2)(c) of the Rules, although there remains a discretion as to whether or not that power should be exercised.

24    It is apparent from the chronology I have set out that the defendant has not engaged at all in these proceedings. He has evinced no intention to defend the proceedings or proffered any explanation for the various defaults, save for certain unparticularised emails to the Court in 2021 as to his inability to attend virtual case management hearings due to ill health.

25    Furthermore, the process server has deposed to the circumstances in which he personally served the defendant. When he served the originating application, statement of claim and supporting affidavit, the defendant identified himself as “Steven”, but upon becoming aware of why the process server was at his home he denied that his last name was “Cvetkovic”. When the defendant was personally served with the interlocutory application and supporting affidavit the defendant is said to have denied that he was the defendant until the process server produced a photograph of him, at which point the defendant agreed it was him.

26    I am satisfied that the defendant has manifested an unwillingness to cooperate with the Court and the plaintiffs in the proceeding. The delay of some 10 months in filing a defence, as the plaintiffs submit, is inordinate. It has prejudiced the plaintiffs’ ability to bring the case to trial within a reasonable period and is contrary to the overarching purpose of civil procedure and practice in ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth).

27    The defendant’s defaults have been ongoing since the proceeding was commenced. The plaintiffs have personally served the defendant on two occasions and have continued to make diligent attempts to contact him by email, text message and Facebook. The plaintiffs have undertaken all reasonable preliminary steps so that the proceeding is otherwise ready for hearing and determination. As is further explained below, I am satisfied that on the face of the statement of claim the plaintiffs are entitled to the relief that is claimed in so far as the insolvent trading claim is concerned. The elements of the claimed insolvent trading are pleaded. Noting that default judgment should not be entered lightly, in the circumstances of this case I am satisfied that it is appropriate to enter judgment in default under r 5.23(2)(c) for the insolvent trading claim.

Relief sought by the plaintiffs

28    By the originating application and statement of claim the plaintiffs sought relief against the defendant as follows:

1.    A declaration that the defendant has contravened s 588G of the [Corporations] Act by failing to prevent the Company from incurring debts in the sum of $204,594.08. [It is to be noted that the relevant sum referred to in paragraph 8 of the statement of claim, is in fact $204,694.75, and this should have been the amount claimed in the prayer for relief. This correction was made by counsel for the plaintiffs on the hearing of the present application.]

2.    An order pursuant to s 588M of the Act that the defendant pay to the Company the sum of $204,694.75.

3.    A declaration that the defendant has contravened ss 180, 181, and / or 182 of the Act by making personal credit card repayments in the sum of $89,896.71.

4.    An order pursuant to s 1317H of the Act that the defendant pay to the Company the sum of $89,896.71.

5.    Interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).

6.    Costs.

7.    Such further or other orders as the Court deems fit.

29    The plaintiffs no longer seek the declatory relief as set out in their originating application and statement of claim. They now seek only:

(a)    judgment against the defendant on the insolvent trading claim within the meaning of s 588G of the Act in the sum of $204,694.75;

(b)    interest on this amount pursuant to s 51A of the Federal Court of Australia Act from the date the first plaintiff was appointed as liquidator of the second plaintiff in the sum of $73,317.72 (as calculated in Annexure A of the plaintiffs submissions by reference to paragraph 2.2 of the Interest on Judgments Practice Note (GPN-INT) ); and

(c)    that the defendant pay the plaintiffs’ costs.

30    Section 588M(2) of the Act entitles the first plaintiff to recover the loss and damage which the Company has suffered from the defendant. Section s 588M of the Act is in the following terms:

Recovery of compensation for loss resulting from insolvent trading

(1)    This section applies where:

(a)      a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b)     the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency; and

(c)     the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d)      the company is being wound up;

whether or not:

(e)     the director has been convicted of an offence in relation to the contravention; or

(f)     a civil penalty order has been made against the director in relation to the contravention.

 (1A)  This section also applies if:

(a)     a person (the director) has contravened subsection 588GAB(1) or (2) or 588GAC(1) or (2) relating to disposition of property by a company; and

(b)      one or more creditors of the company have suffered loss or damage because of the disposition and the company’s insolvency; and

(c) the company is being wound up.

This section applies whether or not the director has been convicted of an offence relating to the contravention or a civil penalty order has been made against the director for the contravention.

(2)     The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

(3)     The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.

(4)     Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

31    Because each of the creditors of the second plaintiff have suffered loss and damage in the amount of their respective debts, that is the amount of loss and damage recoverable pursuant to s 588M of the Act: see Powell v Fryer (2001) 159 FLR 433 at 447 [88]-[89] (Olsson, Duggan and Williams JJ); Edenden v Bignall [2007] NSWSC 1122 at [30] (Barrett J). I accept that the material facts supporting the insolvent trading claim are sufficiently pleaded in the statement of claim and thus are made out on the face of the statement of claim. As has been mentioned, the condition that the Court be satisfied that the plaintiff is entitled to relief on the statement of claim before judgment is entered against the defendant does not require proof by way of evidence: see Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (2007) 161 FCR 513 at 523-533 [42] (Moore, Dowsett and Greenwood JJ); Yeo v Damos Earthmoving Pty Ltd, Re Beachwood Developments Pty Ltd (in liq) [2011] FCA 1129 at [9] (Gordon J). What is required is that on the face of the statement of claim there is a claim for the relief sought and the Court has jurisdiction to grant that relief: see Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433 at [3] (Heerey J); Speedo Holdings at [23] (Flick J). These matters are established here.

32    I am therefore satisfied that the plaintiffs should have judgment on their insolvent trading claim and that the defendant should pay the plaintiffs the sum of $204,694.75, together with interest in the amount of $73,317.73. The defendant should also pay the plaintiffs’ costs of the proceeding.

Associate:

Dated:    31 October 2022